Franko Modigliani

Franco Modigliani

Paper assignment

Prepared by: Alibek Zhakhin, Byambatsogt Temuujin

        Franko Modigliani was born in 1918 in Rome. He spent his childhood in Italy and finished Rome University with the degree of Doctor of Laws, in the same year he left Italy because of his Jewish origins and Antifascistic views. Firstly, he moved to France with his wives family and then moved to USA. He was an instructor of economics and statistics At Columbia University and Bard College from 1942 to 1944. In 1944 he also got degree of Doctor of social sciences at New School for Social Research. He defended his thesis for Doctor degree on the topic of “Liquidity Preference and the Theory of Interest and Money”, and was teaching there for a three years. This work was the first publication of Modigliani in English and, in his opinion,  it was one of his main achievements. In 1946, he became a naturalized citizen of United states of America. After 1948 he joined University of Illinois, then Carnegie University (1950-1960), and North-Eastern University (1960-1962) afterwards. Since 1962, as a professor of Massachusetts Institute of Technology, he continued he continued his researches in the field of Macroeconomics that he started before, especially Theory of Cash cylces. During these years, he begins study international financial and billing systems, consequences and methods of fighting with inflation, stabilization policy in open economies. Most widely known works of Modigliani was his works in various areas of finance.          

        1) Personal Finance

        Paul Samuelson once said: "Franco Modigliani many achievements, but "jewel in his crown" - is a hypothesis about the life cycle savings.” Sooner or later all of us will come out of working age, our revenues will decline and we will be forced to maintain the previous level of life use of savings. Therefore, we must accumulate assets during the active life for a time when we will be in retirement. In the model of an ideal life cycle savings assets are exhausted simultaneously with the end of life of their owner. At this very simple statement is largely based the modern theory of savings. Modigliani used it to explain the connection between the savings rate, economic growth and growth the population.

        2) Finances of corporations

        In 1958, F. Modigliani and M. Miller (Nobel laureate in 1990) formulated the theory, which later named on their honor. It says: cost the firm is determined by its real assets and does not depend on securities that it produces. This theorem is based on the assumption the existence of modern capital markets. It allows you to share investment and financial decisions of the firm. Modigliani and Miller belongs method of calculating income from securities, which became generally accepted now. Modigliani is also known as an active participant in the debate on economic policy in the US and in Italy.

The main work

National Incomes and International Trade. (In collaboration with H. Neisser), 1953.

The Collected Papers of Franco Modigliani. 3 volumes. Cambridge, Mass.: MIT

Press, 1980.

Franco Modigliani

(18 June 1918- 25 September 2003)

Childhood and young years.

American economist Franco Modigliani was born in Rome. He was the son of the famous city pediatrician Enrico and Olga Modigliani, voluntarily engaged in the work of social assistance. In 1932, when the boy was 13 years old, his father died suddenly after a failed operation. This drama is strongly influenced on Modigliani, and he is not much remembered next three years, until he entered the Lyceum of Visconti, the best high school in Rome. The spirit of competition proved to be very useful for young men and stimulated his school success. Inspired by them, Modigliani decides to pass the exams for the last year of study earlier, passing them in 17 years (two years ahead of schedule) entered the Medical Faculty of the University of Rome. The family hoped that their son will follow his father's footsteps. However, he convinced that he could not tolerate the type of suffering and blood, and went on to study law as a law degree in Italy opened opportunities for a professional career. In his second year, he participated in the national competition for the work of university students on the effectiveness of price controls and, to his own surprise, won the first prize. Victory in this competition helped awaken his constant interest in the economy. Opportunities for serious study of economic theory in the time of fascism in Italy were limited, and therefore, on the advice of several economists, he began to study the works of their own English and Italian economists by himself. At the same time he established contacts with the anti-fascist resistance. Strong ideological influence on Modigliani had D.Kalabi, consistent anti-fascist, the father of his future wife Serena. After the adoption in 1938 in Italy racist laws on persons of Jewish nationality Modigliani left Italy and moved to Paris. He enrolled at the Sorbonne, mainly dealt worked on his own, preparing to defend the work for the degree of Doctor of Laws. In 1939, he briefly returned to Rome, and after discussion of the theses of his work was in the desired degree of the University of Rome. In anticipation that Europe is about to be a war, Modigliani together with Serena, who became his wife  in May of 1939 received a visa to the United States, and in August of 1939, a few days before the start of the 2nd World War, arrived to New York.

First years in USA.

Foreseeing that the stay in the US will be long, Modigliani began to look for opportunities to realize his interest in economic theory. He managed to get a postgraduate scholarship from the Faculty of Political and Social Science at the New School for Social Research in New York, created specifically to support immigrants from Europe. Within three years, MModigliani was engaged in the research center. Learning at night the wisdom of economics, and earning money for living at day time by selling books. He received basic training in the field of general economic theory, mathematics and econometrics. Last MModigliani was particularly grateful for science to combine theoretical postulates with the results of empirical analysis. The combination of these two principles has become in the future strength of the works of the Modigliani.

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